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The Utah Bankruptcy Blog

Month: April 2013

By Liz Pulliam Weston
Bankruptcy has become little more than a few months in purgatory, rather than the seven-year ache — and lifelong disgrace — it once was.

Deborah and Victor Valle fell behind on their mortgage payments last year after Victor, a 43-year-old union truck driver, was idled by the Southern California grocery workers strike. When their lender started foreclosure proceedings, the Valles hired a lawyer, David Baran, to file a Chapter 13 bankruptcy so they could keep their home and have time to make up the late payments.

Baran filed the bankruptcy papers on Oct. 3, 2003. Within a few weeks, Victor was back at work and the couple had enough cash to bring their mortgage current. But the attorney failed to file the necessary paperwork to stop the foreclosure and didn’t show up for a key hearing — all the while, the Valles said, assuring them that everything was fine.

On Dec. 5, 2003, the couple learned that their home had been sold.

2 types of bankruptcy mills
“Somebody comes to your door and says you have four days to move out,” said Deborah, 39, the mother of four. “That was a shock.”

The Valles now live in a budget Orange County motel. The real estate company that bought their four-bedroom house in La Mirada, Calif., quickly sold it to another family. Deborah sadly watched the new owners move in recently as she was driving by her former home.

As bankruptcy filings have soared to new records, many consumers are turning to high-volume bankruptcy law practices and bankruptcy-petition preparers for help in reorganizing their finances, staving off foreclosure or wiping out debt. Dubbed “bankruptcy mills” by their critics, many advertise heavily on radio and television, while others deluge homeowners in foreclosure by direct mail — which is how the Valles found their attorney.

Bankruptcy mills can come in two flavors:
High-volume practices run by attorneys, who may or may not ever meet their clients before appearing in court.

Storefront bankruptcy-petition preparers who advertise cut-rate services, usually without a lawyer’s help.
Either way, critics say, the results can be disastrous. Some mills employ bait-and-switch tactics, advertising a low-cost bankruptcy and then jacking up the fees. Others insist they can help debtors avoid insolvency for a fat up-front charge, only to push clients into filing — or filing the bankruptcy paperwork without the clients’ knowledge.

Bad advice costs the consumer
Critics say the mills often give poor advice, causing their clients’ cases to be dismissed, leaving them saddled with debts that could have been erased or encouraging them to file when they shouldn’t.

Dawn Carr of Phoenix used a paralegal to file Chapter 7 liquidation to wipe out her student loan debt. It wasn’t until two years later, when a collection agency started calling, that she learned student loans only rarely can be erased in bankruptcy. Hers wasn’t.

“So now I have a bankruptcy on my credit report that is essentially an empty one,” Carr fumed. “What makes me more upset about the whole thing is that they should have known and didn’t say a word, but they sure didn’t have a problem taking my money for all the fees.”

Debtors also can lose property that should have been protected. Miguel Vasquez of Lancaster, Calif., lost his home because of a bankruptcy preparer’s incompetence, according to his attorney, Oscar Parra.

The preparer talked Vasquez into using his girlfriend’s Los Angeles address as his own because the preparer didn’t want to drive to Lancaster, more than an hour away, to attend the bankruptcy hearing, Parra said. Vasquez, who speaks little English, didn’t understand the repercussions of the decision — and apparently, neither did the preparer.

Because the Lancaster property wasn’t listed as his primary residence, the bankruptcy trustee could — and did — seize the home to pay Vasquez’ creditors. Had the preparer listed the property correctly, Vasquez’ equity in the property would have been protected under state law, Parra said.

An increasing problemThe U.S. Trustee Program, which supervises bankruptcy case administration, says bankruptcy mills are an increasing problem. The program filed 243 actions in fiscal year 2002 for attorney misconduct, up 62% from the year before. Actions against bankruptcy petition preparers rose 43%, to 1,150.

Among the cases:
A bankruptcy-petition preparer in Woodland Hills, Calif., advertised $99 bankruptcies, only to use high-pressure sales tactics on low-income elderly and disabled clients to boost the fee to $650.

A bankruptcy-petition preparer in Alexandria, Va., called himself a “foreclosure specialist” and charged up to $3,500 for his services, which included trying to buy clients’ homes at below-market prices and then renting the properties back to them.

An Oklahoma City attorney repeatedly failed to show up for bankruptcy hearings, in one case forcing a disabled client to make a 280-mile journey to attend a rescheduled meeting.

A Denver attorney in at least five cases redeemed his clients’ property from foreclosure proceedings, reselling each time for profits of up to $50,000.

In Los Angeles, the U.S. Trustee last year forced attorney Claudia Phillips to sell her practice as part of a settlement agreement after she repeatedly failed to meet with clients or represent them adequately in court. Court papers said Phillips allowed others to forge her signature and those of her clients on documents, adding that Phillips’ husband, Kenneth, who was not a lawyer, actually ran the practice and offered legal advice.
Another problem, bankruptcy attorneys say, is lawyers who push clients with few assets into Chapter 13 repayment plans rather than the Chapter 7 liquidation plans that make more sense. The reason? Chapter 13’s increased complexity means higher fees — and the repayment plan puts the attorney first among all the creditors who get repaid.

DIY bankruptcy on the rise
The problem of bad or incompetent advisers has grown so acute in recent years that two years ago the then-U.S. Trustee for the Southern California bankruptcy court, one of the busiest in the nation, took the extraordinary step of warning consumers about the perils of discount advice.

The trustee, Maureen Tighe, now a bankruptcy court judge, said debtors were “routinely” losing property in bankruptcy that should have been protected or were winding up stuck with debts that should have been erased.

The report, co-authored with the Los Angeles County Bar, focused on the rise of bankruptcy-petition preparers in the area. Nearly one in three bankruptcy filings in Southern California is “pro se” (“for self”), which means the filer has no attorney and has typically used a bankruptcy-petition preparer. The rate is nearly one in two in Santa Barbara, home of the largest bankruptcy-petition preparer chain, We the People.

Some firms cry ‘foul’Some of those dismissed as bankruptcy mills, however, say they’re getting a bum rap.

“We do thousands and thousands of bankruptcy filings a year, and the vast, vast, vast majority have gone through just fine,” said Jason Searns, general counsel for We the People, which has 150 offices in 28 states. “We are serving a huge, underserved market that can’t afford lawyers.”

We the People is the nation’s largest legal self-help chain, advertising $199 bankruptcies, $349 divorces and low-priced business incorporation services. The company does not provide legal advice, Searns said, but helps consumers fill out the appropriate forms to represent themselves in court.

“Is it perfect for everyone? No. There are some people who really should go to lawyers,” Searns said. “But people have the right to do it themselves if they want to, just as people have the right to go to Home Depot and do their own bathroom.”

Petition preparers and discount attorneys say they’re being lumped in with incompetents and scam artists as part of a legal turf war by higher-priced attorneys trying to protect their fees. The high-volume operators say they offer consumers a low-cost alternative to regular bankruptcy attorneys, who typically charge $800 to $2,500 for a bankruptcy filing.

Advice that’s simply wrongBut critics say too many consumers are being scammed, ending up with botched cases or filing for bankruptcy when they really shouldn’t.

“‘Bankruptcy-petition preparer’ is a nice term for something that’s evil,” pronounces Leon Bayer, a Los Angeles bankruptcy attorney with 25 years’ experience who now represents the Valles. “It’s a street-corner paralegal who thinks that ‘whatever a lawyer can do, I can do,’ and their clients pay the price.”

Then again, bankruptcy-mill attorneys may not be much better. In addition to representing clients whose attorneys have served them poorly, Bayer has collected some of the direct-mail appeals his clients receive when their lenders start foreclosure proceedings, a public process that tips off bankruptcy mills that someone might need their services. Some of the most deceptive letters were sent by attorneys soliciting business, Bayer said.

“Chapter 13 is NOT BANKRUPTCY,” one attorney-sent letter proclaims, “but rather the ‘Wage Earner Plan’ designed to allow financially troubled persons to pay their bills, not wipe them out.”

Of course, Chapter 13 is a bankruptcy filing. In return for paying some of their debts over three to five years, consumers can have the rest of their debts erased. In Chapter 7, most unsecured debts (other than student loans and recent taxes) are wiped out without a repayment plan.

Both types of filings put an automatic stop to any foreclosure or eviction proceedings, but Chapter 13s typically make it easier to protect the equity in a home. In a Chapter 7, the home’s equity may be used to pay creditors.

For the Valles, justice is more bitter than sweet
Unlike some bankruptcy-mill victims, the Valles actually knew they were filing for Chapter 13. But the Valles say their attorney failed to act when their lender gave notice that it wanted to reinstitute foreclosure proceedings, a routine procedure known as “a motion for relief from the automatic stay.”

After receiving a letter from the court about the motion, the Valles said they phoned their attorney and visited his office and were reassured the matter would be taken care of. A month after the lender filed its motion, the Valles got notice that the court had granted the lender’s request. Court records show no opposition to the motion that was filed, and the Valles said the attorney failed to attend the hearing. Less than 10 days later, the home was sold.

The Valles have received some justice. Bankruptcy court Judge Thomas Brown recommended that Baran be disbarred from bankruptcy practice, ruling that his “failure to perform services competently . . . directly caused the debtor, Victor R. Valle, to lose his home in a foreclosure sale.”
The Valles are pursuing a malpractice case against Baran as well. But the most they can hope for is a return of the home equity they lost when their house was sold. They won’t be able to get their house back or receive any compensation for the trauma they experienced.

“There’s no such thing as ‘pain and suffering’” in such cases, Deborah Valle said. “We lost our house, and that’s it.”

Orem, UT – Douglas L. Barrett of Orem has been named for the eighth consecutive year as one of the top bankruptcy lawyers in Utah in a recent poll conducted by Utah Business, a state-wide publication. The announcement was made in the 2013 Legal Elite Edition of the magazine. The “Legal Elite” represent those Utah lawyers who their peers believe are the very best in their respective areas of practice.

Barrett was selected for his expertise in “Bankruptcy Law” Barrett received his undergraduate degree from Brigham Young University at Provo in 1993 and graduated from Whittier Law School in 2000, where he was a distinguished member of the Moot Court Honors Board. During law school he interned as a Law Clerk for the Hon. James N. Barr, U.S. Bankruptcy Court Judge for the Central District of California. After graduation from law School he served as Law Clerk for the Hon. Lee M. Jackwig, Chief Judge U.S. Bankruptcy Court for the Southern District of Iowa (2000-2001).

Mr. Barrett opened his own bankruptcy practice in Orem in 2001. He is well known for his aggressive representation of consumer debtors. During the past several years he has helped thousands of people file for bankruptcy protection in the U.S. Bankruptcy Courts. He is a member of the National Association of Consumer Bankruptcy Attorneys and has been a frequent speaker on consumer bankruptcy law and personal finance issues throughout the state.

A chapter 7 case begins with the debtor’s filing a petition with the bankruptcy court.1 The petition should be filed with the bankruptcy court serving the area where the individual lives or where the business debtor has its principal place of business or principal assets. 28 U.S.C. § 1408. In addition to the petition, the debtor is also required to file with the court several schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executory contracts and unexpired leases. Bankruptcy Rule 1007(b). A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). (Official Bankruptcy Forms can be purchased at a legal stationery store. They are not available from the court.) In order to complete the Official Bankruptcy Forms which make up the petition and schedules, the debtor(s) will need to compile the following information: 1. A list of all creditors and the amount and nature of their claims; 2. The source, amount, and frequency of the debtor’s income; 3. A list of all of the debtor’s property; and 4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc. Currently, the courts are required to charge a $155 case filing fee, a $30 miscellaneous administrative fee, and a $15 trustee surcharge (a total of $200). The fees should be paid to the clerk of the court upon filing or may, with the court’s permission, be paid by individual debtors in installments. 28 U.S.C. § 1930(a); Bankruptcy Rule 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. Rule 1006(b) limits to four the number of installments for the filing fee. The final installment shall be payable not later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. Bankruptcy Rule 1006(b). The $30 administrative fee and the $15 trustee surcharge may be paid in installments in the same manner as the filing fee. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 707(a). The filing of a petition under chapter 7 “automatically stays” most actions against the debtor or the debtor’s property. 11 U.S.C. § 362. This stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even telephone calls demanding payments. Creditors normally receive notice of the filing of the petition from the clerk. One of the schedules that will be filed by the individual debtor is a schedule of “exempt” property. Federal bankruptcy law provides that an individual debtor2 can protect some property from the claims of creditors either because it is exempt under federal bankruptcy law or because it is exempt under the laws of the debtor’s home state. 11 U.S.C. § 522(b). Many states have taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. Legal counsel should be consulted to determine the law of the state in which the debtor lives. A “meeting of creditors” is usually held 20 to 40 days after the petition is filed. If the United States trustee or bankruptcy administrator3 designates a place for the meeting that is not regularly staffed by the United States trustee or bankruptcy administrator, the meeting may be held no more than 60 days after the order for relief. Bankruptcy Rule 2003(a). The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor’s financial affairs and property. 11 U.S.C. § 343. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting. The trustee also will attend this meeting. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The trustee is required to examine the debtor orally at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, including the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. In some courts, trustees may provide written information on these topics at or in advance of the meeting, to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors. 11 U.S.C. § 341(c). In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to either a chapter 11 reorganization case or a case under chapter 13,4 as long as the debtor meets the eligibility standards under the chapter to which the debtor seeks to convert, and the case has not previously been converted to chapter 7 from either chapter 11 or chapter 13. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another. 11 U.S.C. § 706(a). Role of the Case Trustee Upon the filing of the chapter 7 petition, an impartial case trustee is appointed by the United States trustee (or by the court in Alabama and North Carolina) to administer the case and liquidate the debtor’s nonexempt assets. 11 U.S.C. §§ 701, 704. If, as is often the case, all of the debtor’s assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors. Typically, most chapter 7 cases involving individual debtors are “no asset” cases. If the case appears to be an “asset” case at the outset, however, unsecured creditors5 who have claims against the debtor must file their claims with the clerk of court within 90 days after the first date set for the meeting of creditors. Bankruptcy Rule 3002(c). In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim. If the trustee later recovers assets for distribution to unsecured creditors, creditors will be given notice of that fact and additional time to file proofs of claim. Although secured creditors are not required to file proofs of claim in chapter 7 cases in order to preserve their security interests or liens, there may be circumstances when it is desirable to do so. A creditor in a chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice. The commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all of the debtor’s property. The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor’s creditors are paid from nonexempt property of the estate. The primary role of a chapter 7 trustee in an “asset” case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. To accomplish this, the trustee attempts to liquidate the debtor’s nonexempt property, i.e., property that the debtor owns free and clear of liens and the debtor’s property which has market value above the amount of any security interest or lien and any exemption that the debtor holds in the property. The trustee also pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee’s own causes of action to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to set aside preferential transfers made to creditors within 90 days before the petition, the power to undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition, and the power to pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the debtor’s business for a limited period of time, if such operation will benefit the creditors of the estate and enhance the liquidation of the estate. 11 U.S.C. § 721. The distribution of the property of the estate is governed by section 726 of the Bankruptcy Code, which sets forth the order of payment of all claims. Under section 726, there are six classes of claims, and each class must be paid in full before the next lower class is paid anything. The debtor is not particularly interested in the trustee’s disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The debtor’s major interests in a chapter 7 case are in retaining exempt property and in getting a discharge that covers as many debts as possible. Discharge A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult competent legal counsel in this regard prior to filing. As a general rule, however, excluding cases which are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a complaint has been filed objecting to the discharge or the debtor has filed a written waiver, the discharge will be granted to a chapter 7 debtor relatively early in the case, that is, 60 to 90 days after the date first set for the meeting of creditors. Bankruptcy Rule 4004(c). The grounds for denying an individual debtor a discharge in a chapter 7 case are very narrow and are construed against a creditor or trustee seeking to deny the debtor a chapter 7 discharge. Among the grounds for denying a discharge to a chapter 7 debtor are that the debtor failed to keep or produce adequate books or financial records; the debtor failed to explain satisfactorily any loss of assets; the debtor committed a bankruptcy crime such as perjury; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the estate. 11 U.S.C. § 727; Bankruptcy Rule 4005. In certain jurisdictions, secured creditors may retain some rights to seize pledged property, even after a discharge is granted. Depending on individual circumstances, a debtor wishing to keep possession of the pledged property, such as an automobile, may find it advantageous to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay all or a portion of the money owed, even though the debtor has filed bankruptcy. In return, the creditor promises that, as long as payments are made, the creditor will not repossess or take back the automobile or other property. Because there is a disagreement among the courts concerning whether a debtor whose debt is not in default may retain the property and pay under the original contract terms without reaffirming the debt, legal counsel should be consulted to ensure that the debtor’s rights are protected and that any reaffirmation is in the debtor’s best interest. If the debtor elects to reaffirm the debt, the reaffirmation should be accomplished prior to the granting of a discharge. A written agreement to reaffirm a debt must be filed with the court and, if the debtor is not represented by an attorney, must be approved by the judge. 11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements contain an explicit statement advising the debtor that the agreement is not required by bankruptcy or non-bankruptcy law. In addition, the debtor’s attorney is required to advise the debtor of the legal effect and consequences of such an agreement, including a default under such an agreement. The Code requires a reaffirmation hearing only if the debtor has not been represented by an attorney during the negotiating of the agreement. 11 U.S.C. § 524(d). The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. 11 U.S.C. § 524(f). Most claims against an individual chapter 7 debtor are discharged. A creditor whose unsecured claim is discharged may no longer initiate or continue any legal or other action against the debtor to collect the obligation. A discharge under chapter 7, however, does not discharge an individual debtor from certain specific types of debts listed in section 523 of the Bankruptcy Code. Among the types of debts which are not discharged in a chapter 7 case are alimony and child maintenance and support obligations, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for criminal restitution orders under title 18, United States Code. 11 U.S.C. § 523(a). To the extent that these types of debts are not fully paid in the chapter 7 case, the debtor is still responsible for them after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, and debts arising from a property settlement agreement incurred during or in connection with a divorce or separation are discharged unless a creditor timely files and prevails in an action to have such debts declared excepted from the discharge. 11 U.S.C. § 523(c); Bankruptcy Rule 4007(c). The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the United States trustee if the discharge was obtained through fraud by the debtor or if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee. 11 U.S.C. § 727(d). More information on Utah Bankruptcy at http://www.utahchapter7.com

Yes. Actually there are two required classes you must complete in a Utah bankruptcy. The first class, credit counseling, informs you of all your options and advises you if Utah bankruptcy is a good option. This class can be taken over the internet. This must be completed at least a day before your case can be filed with the Utah bankruptcy court. After your case is filed, you have to complete a Financial Management class. This class

will help you learn to budget your money, avoid the pitfalls that may have led to your bankruptcy filing, and help you to re‐establish credit in the future. This course is also offered over the internet and must be completed before your case is over, otherwise you will be denied your discharge of debt in your Utah bankruptcy. More information on Utah bankruptcy can be found at http://www.utahchapter7.com

How do you find the right bankruptcy attorney? This is a common question. I ran across this article recently that may be of interest written by Orlando bankruptcy lawyer and Chapter 7 Trustee, Lori Patton. An experienced bankruptcy lawyer will not be offended and will be happy to answer them:

1. How much of your practice has been bankruptcy since the new law hit in 2005? (the answer needs to be at least 50% or higher)

2. How many bankruptcies have you completed since the law changed in 2005?

3. Did you do bankruptcy before the law changed? If yes, how many years of experience?

4. Are you involved in any voluntary bankruptcy bar groups? (The answer to this really needs to be at least NACBA –National Association of Consumer Bankruptcy Attorneys-)

5. Do the local bankruptcy judges know who you are? (you need a “yes” for this one)

6. Can you name all of the local Chapter 7 Trustees and do they all know who you are? (you need a “yes”)

7. Who is the local Chapter 13 Trustee and does he/she know who you are?

8. Who is the United States Trustee for this area and do they know who you are?

If the bankruptcy lawyer you are considering trusting with your major lifetime event cannot comfortably answer these questions to your satisfaction, it may be a sign to move on and find someone who can. More information can be found at http://www.utahchapter7.com